Risk aversion and career concerns are pushing managers to play it safe, reducing the shareholder value of their companies — and the incentive compensation structures meant to motivate managers often have the opposite effect.

A controlled experiment reveals that managers ‘adjust’ their ethics based on the behaviour they witness from peers. If a peer is honest, the observing manager becomes a little more honest, on average. If a peer is dishonest, the observing manager can become significantly more dishonest.